Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 140 - 159)



  140. To what extent are these costs passed on to customers? Have some of your members' customers refused to pay any more so they have to be absorbed by your members themselves?
  (Mr King) It is fairly well understood that in terms of the manufacturing side of the UK, all manufacturers are looking for significant reductions in their operating costs within the UK; indeed some of them do not have any funds to pay any increases at all. We have plenty of our members saying that they cannot extract any increases in transport costs from their customers, indeed they are being faced with looking at decreases in order to make that customer a little more competitive with his European counterparts. At the very least many of our members do have clauses in contracts which in theory would enable them to pass on any fuel increases. Generally speaking only a portion of that, after a great period of negotiating with the customer, ever seems to get authorised by the customer. In most cases they say "That's it. That's all you're getting, in terms of increases this year. That's the increase we are going to give you to cover fuel costs". All the other increases an operator might have in wages, vehicle depreciation, insurance, which have shot up over the last three or four years so they are at very high levels indeed compared with where they used to be, have to be absorbed by the haulier and of course that is putting enormous strain on his cash flow and the ability to continue to operate as a business.

  141. It has been suggested that there is a degree of overcapacity in your industry. One would imagine that would tend to force prices down and make people more competitive. Is that the case? The figure was quoted in a letter from Lord Macdonald, the Transport Minister, suggesting something of the order of 20 per cent overcapacity. Is this a figure you would recognise?
  (Mr King) It is difficult to understand the word "overcapacity" in an industry so wide and diverse as the haulage industry because it covers many, many facets from tippers to tankers to general haulage, delivery, parcels delivery and so on. If, for instance, you look at the movement of sugar beet in East Anglia, which is currently taking place, that will involve 5,000 bulk carriers who will be on contract to move the sugar beet into the sugar refineries, something like 8.5 million tonnes over a 24-week period. They need every truck they can get to move the sugar beet but at the end of the sugar beet campaign, in theory, yes, there would be overcapacity of those vehicles. They will move on to other work but it may be more difficult to find work to involve that entire fleet and some of the vehicles may be laid up. The only other example we have is that 20 years ago 500,000 HGVs over 3.5 tonnes were moving freight about the UK. That figure is now down to 422,000. Although of course trucks have got bigger, it perhaps demonstrates also that they have become more productive, more efficient and are being worked harder. I would not want to say that there was a 20 per cent overcapacity. Certainly at times of the month, for instance at the end of the month, just-in-time deliveries, many manufacturers do not want goods in on the last few days of the month because they have to pay for them much faster than if they get them on the first few days of the next month. If you checked some hauliers you would therefore find vehicles parked up in the last week of a month but in the first week of the month there is probably an undercapacity to move goods. It is very difficult to say there is an overcapacity. It is a market driven industry and if there is business there then the industry will respond.

  142. Compared with other countries, do we have more trucks per pound of GDP or whatever measure you care to use? How does our freight transport industry relate to other parts of the European Union in terms of the number of lorries on the road? Given all the burdens our industry is supposed to be carrying, according to the evidence we have received, one would imagine that the numbers would be tumbling in comparison with other countries.
  (Mr King) The economy is growing. The changing pattern of distribution and deliveries to factories has changed also. There are no longer the great central warehouses where companies would stock 30, 60 days' supply of alternators for a car factory for instance. They only want what is sufficient for an hour's production delivered into them. The haulage industry in the UK has had to get extremely efficient and productive. To that extent I think I can say without much debate that we have the most efficient and productive haulage industry in Europe. Of course ours is slightly different in structure than elsewhere because geographically the country is different from, say, France and Germany: distances are different and more can be done in the truck than perhaps could be done by the train elsewhere in Europe where distances are considerably more than you would get in the UK.
  (Professor McWilliams) If you want to look at the efficiency of the industry and the utilisation you really compare two different things. The first is the average journey length and the second is the utilisation of any particular vehicle. As far as average journey lengths are concerned, you really cannot make a logical comparison between different market structures, different countries and so on. The average journey lengths in the UK are shorter but it would be bizarre if they were longer, given the size of the country and so on. In terms of the actual utilisation, percentage running empty and that kind of thing, there is no very good information on it, but my guess would be, just looking at the overall numbers, that the UK would be between five and ten per cent higher utilisation rates than the European average, which is quite a good figure.

  143. Do you have any feel for the accuracy or otherwise of the 20 per cent overcapacity which Lord Macdonald's advisers—or whoever wrote the letter on his behalf which he signed—quoted?
  (Professor McWilliams) It is a very difficult thing to measure. At one level—the point Mr King made earlier—there is difficulty in passing on cost increases. To some extent if you can say you cannot set your price, it may mean that economically there is a bit of overcapacity in that sense. To have the capacity for the industry to be able to pass all cost increases on into price, would probably mean that there would be technical shortages from time to time, giving the pricing power to the people in the industry. What I should be extremely worried about is if someone used a figure based on the fact that from time to time freight vehicles run empty, which they actually have to do for technical, sometimes legislative reasons and translated that number into an estimate of overcapacity. If they have done that then they have clearly made a mistake. That is not the way to look at that kind of issue.

Mr Morgan

  144. May I follow up the point about the inability to pass the costs onto your customer? That implies that the customer has an alternative which he will go to if one operator puts his costs up. What are these alternatives? Are they other members of your Association who are not putting up their costs?
  (Mr King) There are alternatives, of course. It is a competitive business and there is no shortage of companies looking for work to develop their own business and to engage in new contracts. There is no doubt that obtaining business and a new long-term contract with a major customer is a very tedious, time-consuming and exacting task where the last 0.1 pence in cost has to be evaluated and cut out of the system. The main issue here is that it is not a question of playing one haulier off against another, though there may be some element of that. It is the fact that the customer simply cannot pass on or cannot absorb any price increases; it is just not possible if they are to remain viable themselves. You do meet a sort of Mexican standoff here: the haulier has to stay in business and perhaps finds he has to continue doing work at the rate he was using previously even though he needs a higher rate. I would not want to say that no increases at all are obtainable from customers because clearly some are available, but not to cover the rapid increase in costs a haulier has had to face over the last 12 months or so.

  145. What you seem to be suggesting is that there are customers who for some reason cannot put their prices up. It would be interesting to identify who these customers are and what percentage of your customers these people are. Also you seem to be saying that it is always you who give in rather than they who give in when it comes to putting up prices. That seems a bit strange.
  (Mr King) There is one government agency which had in its contract with a haulage business a clause allowing increases in fuel prices to be passed on. The company doing the haulage had already obtained an increase in its rates because of fuel increases. When it went back again for a six per cent increase the customer was not prepared to entertain that, even though the contract in theory allowed it and indeed in the end they settled for three per cent. The operator is only getting half what they need for the extra fuel costs they are paying and that is from a government agency. That actually is probably a more generous concession than you would find for instance in another big customer up in the North East, Coros for instance, who we do know have been particularly strident in seeking the very best rates they can get from their hauliers and that has in many cases precluded any increase at all.

  146. Given that customer, the government agency, needed to move whatever it was they were moving about the country, presumably they reckoned that if your member had decided to say they were walking away from the contract, they could have gone somewhere else.
  (Mr King) Yes, that is a theoretical assumption. That could have happened and might happen even as we speak. It is entirely permissible for the haulier concerned or the group of hauliers concerned to say they cannot move these goods at a price which is giving them any satisfactory return. I am not sure they have got to that stage yet, but it demonstrates that the competitive nature of the industry is such that you cannot automatically adjust your prices to accommodate pressures of increased costs which are outside your control.

Mr Butterfill

  147. We have had evidence and it is mentioned in your memorandum that the disparity in the fuel duty costs in the United Kingdom, not to mention the excise duty as well, is huge, about two and a half times on average. In your memorandum your conclusion is that unless the Government takes some pretty urgent action to remedy this then "... thousands of jobs and hundreds of millions of pounds will be ... lost this country". What job losses have your members actually suffered during the course of this year? Can you give a figure?
  (Mr King) It would be difficult to put a figure on it. There has been not necessarily a hugely discernible trend in terms of the bankruptcies and hauliers going out of business because of receivership. What we have seen is a considerable number just selling up and moving out of the business. They have been able to meet their costs and their creditors, they have sold their fleet and terminated their business accordingly. A fairly important part of the regional or even local transport infrastructure—companies may have been hauling for farmers—has gone out of business and that in turn has had an impact upon the farmer who finds that they cannot get transport for their goods and products at an economic rate. It is a bit of a vicious circle. It would be very difficult to put any figures on it. Do you have any?
  (Mrs Leeming) No, not figures. The other element of that is that there is certainly evidence of companies putting one or two of their vehicles out of operation and just running a smaller number.

  148. It would be very helpful to us if you were able to dig up some figures which would support these contentions. How do you think it compares with earlier years? Can you make that comparison?
  (Mr King) The trend is very much a reduction in capacity. It is likely to accelerate substantially over the next 12 months or so, if the present position on operating costs, fuel and so on, remains as it is. What we understand from our members is that many of them are hanging in there on the basis that things must get better.

  149. Teetering on the brink.
  (Mr King) Yes and they are rationalising. If they had five trucks employing a father and son and three drivers they are now down to the father and son. The business is still there but the number of vehicles taken out of that business is quite considerable.

  150. And the number of employees.
  (Mr King) Yes; has dwindled.


  151. Given the fact that these vehicles are right-hand drive, where are they going? Who is buying them or are they just not replacing them, they are sending them to a scrap heap? Frankly so far you have not really given us one bit of evidence to suggest that there is something other than overcapacity in the industry and that there is some kind of natural shakedown process taking place as a result of the buffeting which comes from the petrol price increases. You have not really given us any figures at all. It seems ridiculous that you produce very glossy literature, very attractively produced literature based on facts which are almost out of date now and we are asking for things which have happened in the last six months and you do not seem able to quantify that.
  (Mr King) There are 100,000 haulage businesses in the UK and new ones start up, owner-drivers start up. Maybe they have bought a vehicle from someone who is rationalising his business. The best way to check on these figures is to check with the licensing authorities the number of O licences which are available or in circulation at the moment. That is a figure which we do not actually have. From our point of view we would expect to lose and are losing out of 8,500 haulage members something like 900 a year and replace them with about 700 new businesses. What we are actually finding is that the number of trucks actually in circulation is reducing. We lose a member with 20 trucks and take on a new member with two. So although the membership remains fairly static, the number of vehicles in use has reduced. There has been, as a result of market forces, a reduction in the number of vehicles in use but that has largely been compensated for by bigger vehicles, more intensive working, higher productivity, greater efficiency, by those operators which are in the business of providing haulage. Looking at the overcapacity side, I would say it could be 20 per cent. I do not know of any way in which you could actually establish a positive figure on that.

Mr Butterfill

  152. The DTI figures actually show that there has been a decrease in bankruptcies in your sector since 1992. Do you dispute the DTI figures or are you saying you are in a totally new situation which they have not cottoned onto yet because it has all come so recently? The fuel escalator has been going for quite some considerable time and although it has come to what appears to be a crisis point at the moment, one would have thought it would have been discernible in the DTI figures.
  (Mr King) Not necessarily through bankruptcies as such. An awful lot of people have just sold up. Every month we get a picture of members who have not renewed their membership and have folded up their businesses.


  153. Where are these Marie-Celeste lorries going? If they are selling up they are obviously not going off the road and somebody else is utilising them or do we have hidden airfields somewhere, as we have with motor cars, where we have lorries parked away out of sight and out of mind?
  (Mr King) We certainly do have very large parks of trucks as a result of leasing programmes by the manufacturers, but I am not sure that is relevant to what we are discussing at the moment. You are asking where all these trucks have gone.

  154. Where have the lorries gone?
  (Mr King) I guess if they have sold up and sold the land the business is on—many hauliers operate out of yards which do have some redevelopment potential—that the vehicles may be fairly old and when we say sold up we mean they have sold the business, the land it is on, the workshop, for redevelopment and got out that way. What happens to the trucks I would not want to say.

Mr Butterfill

  155. Are they just not buying new lorries or leasing new lorries? Is there a discernible reduction in the number of right-hand drive lorries being purchased or leased from the manufacturers?
  (Mr King) The market for new trucks is particularly tough at the moment, but I do not think there has ever been an occasion when it has not been tough. New registrations continue to take place and you can see on the motorways or roads the number of fairly modern trucks which are in circulation. It remains a challenge to sell new trucks but some of the smaller operators who are ceasing business are not necessarily in the market for brand new trucks. They are the ones who will buy a used one of three or four years of age.

Mr Laxton

  156. One of the approaches you have taken in trying to get some analysis of what is happening is you are seeing a reduction in the number of companies who remain members of your Association. Might it just be that they wanted to reduce their overheads and they just cut some of them out by not renewing their membership. It is hardly a scientific approach, is it, to say that could be one of the reasons? That is the analysis you are using. I think you said that you are seeing this reduction in membership and then you are drawing some conclusion from that that people are going out of business which is quite contrary to the figures we have from the DTI. It is not a very scientific approach.
  (Mr King) I would not say that it was not a scientific approach. We have regional managers who visit these businesses chasing up membership renewal and if the proprietor says he is not renewing because he is packing up the business or he cannot afford the £200 or £300 for membership this year, we will know that is the case. Indeed if they have gone bust we know the reason why they are not renewing membership. What we have seen is that there is a trend towards people actually getting out of the industry and realising the assets they have.

  157. Do you acknowledge that there has not been a trend of people going into bankruptcy to any great degree? It is people selling their business on elsewhere.
  (Mr King) Yes, the figures are there, the level of bankruptcy as such has not rocketed in the way that perhaps some might have assumed.

  158. It has decreased from 1992.
  (Mr King) Yes, but that does not indicate really whether the structure of the business is changing. Many businesses are not renewing their O licences or are just going out of business in a voluntary way.
  (Professor McWilliams) There has been a reduction in the number of trucks on the road; a reduction of roughly 100,000 has taken place over a ten-year period. The biggest pace of reduction was in the early 1990s but the interesting thing is that since the economy has recovered through the 1990s and into the twenty-first century the number of lorries on the road has been flattish, changed a little bit from year to year. Sales of new lorries peaked at 90,000; I do not have the precise numbers with me but around about 90,000 at the end of the 1980s. The present figures are something like 45,000 a year and they dropped to a lowest point of about 26,000 in the early 1990s, probably 1992 or 1993. I am sorry, I do not have all these figures in my mind. However, that is really what has been happening to the industry and it has contracted in terms of number of lorries, partly as a result of increased penetration from overseas and partly as the result of increased efficiency of the domestic industry. Bankruptcies were at an all-time peak in 1992 for the sector because that is the point where the industry went through its greatest restructuring. With respect, that is probably not the best period to make a comparison from. It is perfectly true that bankruptcies today are at a lower rate. We have not yet seen the impact of the latest fuel price rises on bankruptcies and we probably will not get those in the figures for some 18 months, so we will not yet be certain. I should be surprised if they went up quite as high as they went up then because that was a period of most intense pain for the industry. It is certainly true that bankruptcies in the industry are starting to rise now and I should expect to see them going up further over the next 18 months.

Mr Morgan

  159. Do you have any figures for the amount of goods being moved by your members or by the UK industry? How has that changed over the period we are talking about? Presumably that is really what we are interested in. It is not how many lorries we have, it is whether we are moving goods about the country.
  (Professor McWilliams) The growth through the period when the economy has been growing reasonably well, in terms of tonnes/kilometres, which is probably the best complete measure of this, has been running at round about four per cent per annum; sometimes a bit above that. It has been a bit patchy, to do with the industry cycle, but essentially it has been running round about that, which compares with GDP growth over this period of just a bit over 2.5 per cent. In theory, in normal circumstances, you would have expected the jobs in the industry probably to be rising as a proportion of the whole in line with the rise in the share of the industry in GDP. That does not appear to have happened. It appears that the jobs in the industry have been pretty flat compared with a general rise in employment as the economy has grown and after a fairly severe contraction in the industry in the early 1990s.

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